Congress' game of chicken on flood insurance could hurt home buyers

Floating piggy bank

If you’re buying a house or refinancing a mortgage and your home is in a flood zone, the federal budget negotiations could derail your plans.

That’s because you can’t buy flood insurance when the National Flood Insurance Program (NFIP) runs out of money or isn’t funded -- something that was going to happen in September but was averted by a last-minute congressional deal.

Without flood insurance, you can’t get a bank loan on a home in a flood zone.

Thanks to a deal that ended the latest round of budget bickering on Capitol Hill, the NFIP currently has enough funding to keep going until Nov. 18.

If Congress can’t agree on the budget by then, NFIP funding will run out, and the program will stop issuing new policies.

But you’ll still have to be insured to get a loan on a home in a flood zone.

If you’re buying a home or you want to refinance, you can take over the existing flood policy.

If the lender says you need to be insured and you're not, you’ll likely have to purchase a pricey private-sector policy from a high-end company like Lloyd’s of London, Chubb or AIG, which offer policies in some areas.

Or, you can hope your lender will allow you to apply for NFIP coverage that you’ll get once Congress funds the program again.

I wouldn’t hold my breath waiting for that to happen, because lenders are being extraordinarily careful not to do anything risky in today’s market. And loaning money on an uninsured house that could be washed away by a flood tomorrow is risky.

Congressional arguments about the NFIP are not new. Since 2009, the NFIP has been stopped and restarted five times because Congress turned off the funding spigot.

The Nov. 18 extension doesn’t mean the bickering is over, either.

The program is $18 billion in the red thanks to Hurricane Katrina and other natural disasters and -- no surprise here -- members of Congress don’t agree about how to handle disaster funding and insurance costs.

The House recently OK'd a bill raising federal insurance premiums by about 20% and extending the program for five years.

The Senate’s bill made it out of committee but hasn’t been up for a vote yet by the full Senate.

If you need this protection, you’ll want to know how it all turns out. We’ll keep you posted.

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